Economic Development and Trade in an Era

Economic Development and Trade

In an era of increased globalization and advancements in technology, it has become increasingly important for all of the nations of the world to keep bringing improvements in their economic infrastructure and to expand their businesses on the global scale. It has been observed that without a reasonable level of economic development any country cannot gain a competitive position in the world market. This is the dilemma faced by most of the developed nations of the world.

In this paper we will examine as to how economic development of any country promotes the trade and business and how free trade and liberalization in trade policies, on behalf of the governments, help the businesses to flourish and effectively compete in the world market. We have covered the issues related to the economic development of the developing nations and has discussed the aspects that have caused hindrance in the economic development of these countries. Finally we have cited the example of a developing country (India) and has discussed as to how liberalization in trade has helped it in making remarkable achievements with respect to economic growth and to bring improvements in its industry and trade.

Barriers to economic development:

With the increased globalization and expanding of businesses on a global scale, the global market is becoming increasingly competitive. As the underdeveloped or developing countries are striving to come to the level of the developed nations, they are also considering to expand their business horizons and to expand their businesses worldwide in order to get the benefit from the reduction in barriers to free trade.

However, for the developing nations the journey has never been so easy and they have been facing a number of obstacles in their drive to progress as a developed and prosperous nation. (Levitt, 1983) Among the major barriers are the problems of economic and political uncertainty faced by these countries. Lack of technological expertise and non-availability of skilled personnel to bring advancements with respect to technology is also a major area of concern (I). Although some of these countries have taken constructive measures in this regard and have invested a considerable level of their annual budgets for the development of sciences and technology but in most of the cases the approach used by these nations was wrong. (Jeffrey G, 1998) Governments of the developing nations used to believe that they can "import' technology but purchasing technologically advanced equipments for their industries and by hiring foreign professionals for the maintenance and operations of these equipments. However, they ignored the fact that real advancement in science and technology can only be brought by training the local workforce and by educating the local population. In order to bring technological improvements in this countries, it was needed that these countries should invest in scientific research and development and encourage their local population to participate in such productive activities by awarding scholarships to the talented students, by giving awards and recognitions for any innovation made by anyone.(i) In addition to this, investment in the educational sector was also highly desirable in these countries but all such factors were ignored by the governments of these countries. Instead of this, these countries have been continuously adopting the strategy of "purchasing" the new technologies from the developed nations which resulted in their dependency on the developed countries with respect to technology. This provided the developed nations an edge over the developing countries in international trade. Even in their domestic markets, the business organizations of these countries were not much successful in comparison to the foreign multinational organizations operating in those regions. (Dani, 1998)

Apart from the lack of technological expertise and advancement in technology, there are several other reasons as well that have been continuously hindering in the economic development of these countries and in turn are creating obstacles in expansion of trade in the international markets. (i) Political and economic instability is also one of the major reasons. As most of the developing countries in Asia or Africa were colonies of western countries like Great Britain and France, they gained independence in the mid of the twentieth century. Since their independence most of these countries have been suffering from uncertainties in their political and economic environment. (Justin Lin, 1998) Corrupt government officials and fraudulent industrial lords have been exploiting the general public and creating chaos and uncertainties in the region. Differences of interests among these countries have resulted in wars and have prevented them from directing their resources to some productive activities. Conflict between Iran and Iraq and the internal conflict between several groups in Afghanistan that lasted for years are some of the examples. The absence of a stable economic and political environment in these regions discouraged the foreign investors to invest their money and therefore there have been a minimal inflow of foreign direct investments in these countries. Even if some of the foreign companies took the courage to make investments, they have not found these regions to be much profitable. The reasons were the corrupt practices of government officials, lack of support from the governments of these countries to encourage business, increasing poverty and high rate of inflation prevailing in the region. (Balassa, 1998)

Unequal distribution of power and wealth - a major barrier:

It is widely accepted by the economic experts that the strong economic development is a result of an equal distribution of power and wealth among different groups in a society. This diffusion of power and wealth take place over a long span of time and is usually observed when several groups, which exist in a society, negotiate with each other. They form their alliances with groups that have more power and wealth. As a result, groups with less power tend to gain more power. With the span of time, this process leads to the formation of an institution that creates the foundation of free market economies. This diffusion or balance of power and wealth further leads to the development of a range of political and economic institutions in the country. This helps in the structuring of an open and liberal democratic system. (Justin Lin, 1998) However, where leaders and rulers are in a habit of dictating the development of the economic and political institutions, as is the case with developing countries, power and wealth tends to be concentrated in the hands of a certain group. The absence of the right to claim their privileges among the most seriously affected groups ultimately weakens the existence of moderate institution.

It is therefore obvious that the problems of economic development in the developing countries are as much political as they are considered to be economic. More specifically speaking the problem of economic development faced by most of the developing countries is institutional.

The absence of fairly liberal political and economic institutions has restrained these nations to truly utilize their resources and workforce. It is a great pity that the economists of these countries have failed to recognize the basic rule of economic development that it is not primarily an economic phenomenon, but is dependent on the existence of efficient and functional political institutions that are answerable to a wide range of societal interests. That is why the policies adopted by the governments of the developing countries, to simply alter the economic policies of the country without tackling the problem of nonexistence of democratic institutional structures has prevented these nations from enjoying long-term prosperity. (Balassa, 1998)

The diffusion of power and wealth among all the groups of the society allows the individual members of the society to freely choose their economic occupations and business. Therefore, diffusion of power and wealth promotes economic development. This makes it possible to create democratic governance in the country. Though most of the developing countries claim to have institutions of democracy but having the institutions of democracy does not mean that power and wealth are diffuse.

In most of the developing countries the rulers are in actual dictators despite the fact that they were elected. Moreover, it has been observed that in countries where there is more liberalization for trade, the economic development has been the greatest. In these countries, the private sector has made the regulations instead of the feudal, autocratic rulers or even religious leaders. (Robert C, 1998) These policies were formed keeping in view the interests of individuals from all of the social groups. In the initial stage several agreements were formed which were respected and repeated by the society and after a reasonable span of time they were being adopted into the legal system. Such free market institutions can only be formed when there is no intervention of the government or any other powerful group in the process. Nevertheless, in case of developing contributions continuous and abrupt interventions of the governments and other powerful institutions have hindered in the formation of a free trade market and thus there has been less or no economic development. The economic decline in majority of the developing countries is the result of a political structure that appears unable to continue essential restructuring. (Justin Lin, 1998)(i)

To further the economic development and trade the developed countries can also be of significant help to the developing countries. The international institutions and agencies can facilitate the process of power and wealth diffusion. The development efforts made by the International institutions should be focused on helping the start up and small businesses, of the developing countries, finance themselves so they may gain power in comparison to the discriminatory governments of these countries and not support such governments which try to centralize power and wealth in the hands of a limited group. For most of the businesses in the developing countries as well as the international institutions any such move will be difficult because usually it is usually a legal requirement that the foreign institutions must work through governments, or at least have a permission from the government to function. On the other hand, non-government organizations from the developed countries can work in close coordination with the general public and small, private businesses by providing them consultation for their businesses, granting them mini-credit, giving them advice etc. However, there is no such instance that a perfect diffusion of power and wealth has ever being achieved through development assistance. (Bhagwati, 1995)

Eventually an increase in international trade and globalization will lead to greater power diffusion even in the developing countries. This will increase the ability of many smaller businesses and banks in the less developed countries to challenge their dictatorial governments. Introduction of new technology in these countries, because of increased globalization, will also speed up the process of power and wealth diffusion. For instance the introduction and proliferation of internet and other advanced communication technologies will help the people in the developing countries to freely share information without government intervention. However, there is a higher probability that until and unless the existing governments in these countries lose power, there can be no significant changes. (Young, 1986)

There are some developing countries that have been very successful in their effort to compete with the developed nations. These countries have made the wiser decision to invest in education, technological restructuring, infrastructure development etc. Countries like South Korea, Indonesia, Malaysia and other Far East Asian nations have made massive investments in industrial and infrastructural development that resulted in increased trade at global level by these countries.

In some industries, they have even surpassed the developed countries. Although these countries are also suffering from economic slowdown from the lat few years, the growth in their economies and development in their industries have been very impressive. (Bhagwatti, 1995)

When the developing nations compete with developing countries in the international markets, they face the problem of limited resources to effectively market their products in the market. Usually they have to take the support of a foreign agent who purchases their products and distributes them in the foreign markets. However, using a foreign representative for distribution and promotion of their products is very expensive for them and therefore they are unable to make reasonable amount of profits. On the other hand, they also avail some benefits while trading with a foreign company from a developed country. For instance, some countries make barter arrangements with some multinational organizations in which some high tech products are being purchased in exchange of the products being manufactured by these countries like apparels, food products etc.

In the recent years, governments of these countries have started realizing their past mistakes and are now taking corrective measures in this regard. (Dhar, 1987) Along with making investments in Scientific & Industrial research and education, they are now expanding their presence in the global markets with some new strategies. Some liberalization is being granted to foreign as well as local investors to encourage business and create a healthy business environment. As WTO is working towards creating a free trade market worldwide, the governments of these countries realized that now they will have to handle things seriously in order to prevent their local businesses from severe losses. They have realized the fact that trade openness and economic liberalization are fundamental elements in a country's development strategy. (i) They are now working to actively promote their exports in the world markets and to attract of foreign direct investment as this will boost economic growth and will act as a source of employment in the country. (Young, 1986) To measure the results of increased trade and relation of trade liberalization with country's economic development one can easily observe the fact by finding out that over the past few decades, every country that has worked out to reduce poverty, increase employment & bring stability in the economy, has held trade liberalization as the focus of its economic development strategy.

There are several reasons for which increase in international trade and more liberalized policies of governments towards trade are considered to be the primary factor in the economic development of a country. Market liberalization through clear and translucent policies and regulations, as well as a bilateral system for dispute settlement, makes the commercial transactions more secure. This encourages foreign business organizations to come into a business agreement with the local entities as they have confidence on the market. To encourage international trade and economic development in the developing countries, the World Trade Organization has provided an appropriate institutional framework to let them help in the development of international trade. (Jeffrey G, 1998)

In WTO's efforts to encourage trade and development on a global scale, the new round of multilateral trade negotiations, held in Doha, is of key importance. Several countries have supported the beginning of a new round during the Doha Ministerial. The reason for this support was that they thought that a positive outcome in Doha will rebuild confidence on WTO and strengthen its role as the world's most important negotiation forum. Moreover, it may also provide an opportunity to truly incorporate the developing countries into a mutual trading system. In addition to this, it was expected that in the wage of a slow and declining world economy, it will provide the opportunity for a speedy recovery of growth. (Caroline, 2000)

On the basis of the past experiences, relating to the liberalization of free trade in which the developed nations have exploited the developing countries in their own interests, it is recommended that the WTO must consider the interests of all participants including the developing countries while bringing further liberalization. To meet this requirement there is a need that all the elements should be negotiated through mutual discussions and meetings. Any new negotiation in the WTO or a decision being made should consider the execution problems faced by the developing countries.

In this way the WTO can create an incentive for these countries to participate in new negotiations. (Bhagwatti, 1998)

Economic Development and trade in India:

To specifically study the relation between trade and economic development, we will take the example of India as to how it suffered from economic setbacks in the beginning because of its policy of forming a controlled economy and how encouragement of free trade has opened doors of economic development and prosperity for India. In the last 50 years, since its formation, the Indian economy has gone through intense changes. At the tie of its formation and several years after that the government of India adopted an inward-looking strategy to promote and protect their local industries but recently it has become much more liberalized. Though in terms of industrial output and technological advancement India has made significant achievements but still 70% of its population is working in the agricultural sector. India is one of the largest economies of the world U.S., Japan, China and Germany but the major reason for such a huge size of the economy is the size of the population. If we measure India's economy with respect to the GNP figure its ranking turns down to the 90th place out of 185 countries (Lodge & High).

The performance of the Indian economy was fairly slow in the first decade of its independence. The average growth remained to be around 3.5% per year from 1950-80. However, drastic measures taken to form a more liberalized economy in the 1990s have stimulated growth. In July 1991, the government took some liberalization initiatives that took the economy away from serious crisis.

From 1950 to 1980, India followed the strategy of forming regulations that were highly protective for the local industries. The motive was to gain economic self-sufficiency. Large scale public enterprises were exclusively owned by the governments and majority of the influential industrial sectors were controlled by the government. About 70% of the workforce was on state's payroll and trade unions were extremely strong. Because of this, any improvements in the production processes, technological change or structural reforms were resisted by the workforce because they thought that any such measure might undermine their job security. As a result most of the industrial enterprises owned by the government grew increasingly inefficient with many incurring huge losses but the government still insisted to keep them. (Caroline, 2000) This was the primary reason for a low growth rate in India during 1950-1980. Factors like stat intervention in the business policies and extensive use of agricultural financial backing prevented the Indian businesses from efficient allocation of resources through market forces and competition. The private sector was being controlled by the government through restrictions which resulted in the form of uncompetitive and monopolistic practices in the economy which led to inefficiency of industrial sector, misallocation of resources and corruption.

As the pressure from the business sector increased, the government started to make some arrangements for borrowing with the World Bank in 1984. In order to get a favor from the World Bank, the government of India adopted the strategy of granting moderate liberalization in trade. In the decade of the 1980s, the government kept to increasingly support the liberalization policies. However, the absence of a purely democratic institution and conflict of interests between the governmental policies and the feudal class of India (politicians, industrialists) little was done.

The result was that the borrowing by the government of India exceeded 5% of the GDP, creating an alarming situation for the country. To worsen the problem, subsidies to the agricultural sector reached 12% of the GDP in 1990. India continuously kept experiencing a deficit in its budget and the gap between savings and investment widened. This led to a loss of investor's confidence on the Indian market and a pause of foreign lending. (Pandit, 1992) To resolve the crisis, the government of India finally seek financial assistance fro IMF. In 1991, the government adopted a major liberalization policy. This attempt was made to control the trade deficits of the country by attracting foreign direct investment and increasing exports. India considered the export-oriented growth strategy to be the most appropriate as the East Asian nations have experienced high GDP growth rates because they opened up their economies, focused on increasing their exports and attracted foreign investments especially from Japan. To gain a competitive position in the world market, India adopted several strategies to boost its exports. In 1991, the Indian rupee was devaluated which was a move to boost exports. This plan succeeded and the growth in exports rose from 8.6% in 1986 to 15% in 1995. Government started to reverse its policies and gave up the control of some of the major public sector enterprises and encouraged the growth of private entities. Industries in which entrance was restricted for private enterprises were opened for them including the power industry, steel and telecommunications. Foreign investment which was once welcomed reluctantly was warmly greeted and the foreign companies were permitted to hold the majority ownership of the businesses. Such structural reforms lead to a more stabilized and strong economy and the balance of payment crisis were resolved. Several sectors of the economy were opened up for the private and foreign investors. (Peter E, 1999)

However, even now in some industries, some government protection still remains. Certain quotas restrict the companies to import a certain level of consumer goods. On the other hand, these structural reforms have not benefited everyone. (i) Liberalization in trade and entrance of foreign investors has led to considerable increases in the prices of fertilizers, rice, sugar, gasoline and several other commodities. ((Roman, 1999)

It is obvious from the Indian experience that restrictive policies by the government such as protectionism under import-substitution, is not a good option for economic development. The stagnant performance of the Indian economy between 1950s and the 1980s is an enough evidence to proof the point. In comparison to this, liberalized government policies and restructuring of the economic and political structure of the country in the last few years has given rise to a considerable level of enthusiasm into the economy Indian economy. This can also be seen from the graph (Appendix) which shows the GNP growth rate of India in the past several years. (i)

The economy of India is currently with a steady rate of 5-6% per annum. The economic reforms initiated by the Indian government in 1991 have brought extremely positive results and has resulted in the form of strong economic recovery. By adopting more open trade policies and developing the ability to market its agricultural and industrial products in the international markets, India is now reaping the rewards from its free market trading system. As the domestic industries gained exposure to foreign markets, liberalization in trade policies has considerably helped them to remove the inefficiencies in their products and services that had damaged the manufacturing sector under the restrictive policies system. Privatization has provided an opportunity to the dominant industrial sectors to bring significant improvement. These sectors were less productive under state control.